1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_____to_____.
Commission File No. 1-13783
INTEGRATED ELECTRICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 76-0542208
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
515 Post Oak Boulevard
Suite 450
Houston, Texas 77027-9408
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (713) 860-1500
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding as of August 14, 1998, of the issuer's common
stock was 25,668,614 and of the issuer's restricted voting common stock was
2,655,709.
2
INTEGRATED ELECTRICAL SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
Overview and Basis of Presentation of Financial Statements . . . . . . . . . . . . . 3
Supplemental Pro Forma Combined Statements of Operations
for the nine months ended June 30, 1997 and 1998 . . . . . . . . . . . . . . . . 5
Supplemental Pro Forma Combined Statement of Operations
for the three months ended June 30, 1997 and
Historical Statement of Operations
for the three months ended June 30, 1998 . . . . . . . . . . . . . . . . . . . . 6
Consolidated Balance Sheets as of September 30, 1997 and
June 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Consolidated Statements of Operations for the nine months ended
June 30, 1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Consolidated Statements of Operations for the three months ended
June 30, 1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Consolidated Statement of Stockholders' Equity for the nine months ended
June 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Consolidated Statements of Cash Flows for the nine months ended
June 30, 1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Consolidated Statements of Cash Flows for the three months ended
June 30, 1997 and 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Condensed Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . 17
PART II. OTHER INFORMATION
Item 2. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 26
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2
3
INTEGRATED ELECTRICAL SERVICES, INC.
OVERVIEW AND BASIS OF PRESENTATION
FOR FINANCIAL STATEMENTS
Integrated Electrical Services, Inc. ("IES" or the "Company"), a Delaware
corporation, was founded in June 1997 to create a leading national provider and
consolidator of electrical contracting and maintenance services, focusing
primarily on the commercial, industrial and residential markets. On January 30,
1998, concurrent with the closing of its initial public offering ("IPO" or
"Offering") of common stock, IES acquired, in separate transactions, for
consideration including $53.4 million of cash and 12,313,025 shares of Common
Stock, 16 companies and related entities engaged in all facets of electrical
contracting and maintenance services (collectively, the "Founding Companies" or
the "Founding Company Acquisitions"). Subsequent to its IPO, and through June
30, 1998, the Company has acquired 11 additional electrical contracting and
maintenance businesses for approximately $30.9 million of cash and 3,519,023
shares of common stock (the "Post IPO Acquisitions"). Of these 11 Post IPO
Acquisitions, 10 were accounted for using the purchase method of accounting
(the "Purchased Companies") and one was accounted for using the
pooling-of-interests method of accounting (the "Pooled Company").
Pursuant to the Securities and Exchange Commission's ("SEC") Staff Accounting
Bulletin No. 97 ("SAB 97"), Houston-Stafford due to its significance is for
accounting purposes considered the entity which acquired the other Founding
Companies and IES (the "Accounting Acquirer"). As such, the Company's
consolidated financial statements through January 30, 1998, include the results
of operations of Houston-Stafford and the Pooled Company. The Founding
Companies are included in the Company's results of operations beginning
February 1, 1998, and the Purchased Companies beginning on their respective
dates of acquisition. Houston-Stafford's results of operations through January
30, 1998, include for financial statement presentation purposes a non-cash,
non-recurring compensation charge of approximately $17.0 million required by
the SEC in connection with a note receivable and rights held by an officer of
Houston-Stafford which was exchanged for cash and shares of IES common stock.
IES had not conducted any revenue generating activities of its own prior to
such time. For the period from inception through January 30, 1998, all of
IES's activity related to the completion of its IPO and the Founding Company
Acquisitions.
The unaudited supplemental pro forma combined financial information for the
nine months ended June 30, 1997 and 1998, and the three months ended June 30,
1997, assumes the results of operations include the Founding Companies as if
they had been acquired at the beginning of each period presented and have been
restated to include the pro forma results of operations of the Pooled Company.
Additional pro forma adjustments include: (a) the reversal of
Houston-Stafford's non-cash, non-recurring compensation charge of approximately
$17.0 million as noted above, (b) certain reductions in salaries, bonuses,
benefits and lease payments to the former owners of the Founding Companies and
the Pooled Company which they agreed would take effect as of the effective date
of their respective acquisitions, (c) amortization of goodwill resulting from
the Founding Company Acquisitions, and (d) elimination of interest income and
increased interest expense on borrowings of $6.4 million to fund certain S
corporation
3
4
distributions related to the Founding Company Acquisitions. The Purchased
Companies have been included in the Company's results of operations beginning
on their respective dates of acquisition.
This statement should be read in conjunction with the Company's historical
unaudited financial statements and notes thereto included in this Form 10-Q for
the period ended June 30, 1998. The pro forma adjustments are based on
estimates, available information and certain assumptions which may be revised
as additional information becomes available. The unaudited supplemental pro
forma combined statements of operations do not purport to represent what the
Company's consolidated results of operations would actually have been if such
transactions had in fact occurred on those dates and are not necessarily
representative of the Company's results of operations for any future period.
Since the companies acquired were not under common control or management,
historical results may not be comparable to, or indicative of, future
performance.
4
5
INTEGRATED ELECTRICAL SERVICES, INC.
SUPPLEMENTAL PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Nine Months Ended June 30,
------------------------------------------
1997 1998
------------------ -----------------
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . $ 250,296 $ 303,077
Cost of services . . . . . . . . . . . . . . . . . . . . . 198,888 238,129
------------------ -----------------
Gross Profit . . . . . . . . . . . . . . . . . . . . 51,408 64,948
Selling, general & administrative expenses . . . . . . . . 27,849 34,085
Goodwill amortization . . . . . . . . . . . . . . . . . . 2,886 3,012
------------------ -----------------
Operating income . . . . . . . . . . . . . . . . . . 20,673 27,851
------------------ -----------------
Other (income)/expense:
Interest expense . . . . . . . . . . . . . . . . . . 816 678
Interest income . . . . . . . . . . . . . . . . . . . (69) (469)
Gain on sale of assets . . . . . . . . . . . . . . . - (151)
Other (income)/expense, net . . . . . . . . . . . . . (406) (122)
------------------ -----------------
341 (64)
Income before income taxes . . . . . . . . . . . . . . . . 20,332 27,915
Income tax provision . . . . . . . . . . . . . . . . . . . 8,873 11,852
------------------ -----------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 11,459 $ 16,063
================== =================
Basic earnings per share . . . . . . . . . . . . . . . . . $ .45 $ .62
================== =================
Diluted earnings per share . . . . . . . . . . . . . . . . $ .45 $ .61
================== =================
Shares used in the pro forma computation
of earnings per share (Note 5)-
Basic- . . . . . . . . . . . . . . . . . . . . . . . 25,555,336 25,859,032
================== =================
Diluted- . . . . . . . . . . . . . . . . . . . . . . 25,675,336 26,216,281
================== =================
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6
INTEGRATED ELECTRICAL SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended June 30,
----------------------------------------
1997 1998
----------------- -----------------
(supplemental pro
forma)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . $ 87,258 $ 115,287
Cost of services . . . . . . . . . . . . . . . . . . . . . . 69,539 91,294
----------------- -----------------
Gross Profit . . . . . . . . . . . . . . . . . . . . . 17,719 23,993
Selling, general & administrative expenses . . . . . . . . . 8,976 12,190
Goodwill amortization . . . . . . . . . . . . . . . . . . . 962 1,103
----------------- -----------------
Operating income . . . . . . . . . . . . . . . . . . . 7,781 10,700
----------------- -----------------
Other (income)/expense:
Interest expense . . . . . . . . . . . . . . . . . . . 299 235
Interest income . . . . . . . . . . . . . . . . . . . . (19) (201)
Gain on sale of assets . . . . . . . . . . . . . . . . - (180)
Other (income)/expense, net . . . . . . . . . . . . . . (28) (26)
----------------- -----------------
252 (172)
Income before income taxes . . . . . . . . . . . . . . . . . 7,529 10,872
Income tax provision . . . . . . . . . . . . . . . . . . . . 3,184 4,491
----------------- -----------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,345 $ 6,381
================= =================
Basic earnings per share . . . . . . . . . . . . . . . . . . $ .17 $ .24
================= =================
Diluted earnings per share . . . . . . . . . . . . . . . . . $ .17 $ .24
================= =================
Shares used in the computation
of earnings per share (Note 5)-
Basic- . . . . . . . . . . . . . . . . . . . . . . . . 25,555,336 26,475,914
================= =================
Diluted- . . . . . . . . . . . . . . . . . . . . . . . 25,675,336 27,151,005
================= =================
The accompanying condensed notes to financial statements are an integral part
of these financial statements.
6
7
INTEGRATED ELECTRICAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
September 30, June 30,
1997 1998
------------------ ------------------
(Audited) (Unaudited)
(restated - note 3)
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . $ 4,154 $ 13,337
Accounts receivable, net of allowance of
$537 in 1997 and $3,083 in 1998 . . . . . . . . . . . . 18,898 107,458
Inventories . . . . . . . . . . . . . . . . . . . . . . . . 2,878 5,917
Costs and estimated earnings recognized in
excess of billings on uncompleted contracts . . . . . . 1,368 7,671
Prepaid and other current assets . . . . . . . . . . . . . . 1,173 2,168
------------------ ------------------
Total current assets . . . . . . . . . . . . . . . . . 28,471 136,551
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . 970 208,699
Property and equipment, net . . . . . . . . . . . . . . . . 4,110 16,769
Other non-current assets . . . . . . . . . . . . . . . . . . 2,243 1,478
------------------ ------------------
Total assets . . . . . . . . . . . . . . . . . . . $ 35,794 $ 363,497
================== ==================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current maturities of long-term debt . . . . . . . . . . . . $ 879 $ 516
Accounts payable and accrued expenses . . . . . . . . . . . 13,582 49,859
Billings in excess of costs and estimated
earnings recognized on uncompleted contracts . . . . . 2,417 24,207
Income taxes payable . . . . . . . . . . . . . . . . . . . . 2,083 2,759
Other current liabilities . . . . . . . . . . . . . . . . . 575 1,706
------------------ ------------------
Total current liabilities . . . . . . . . . . . . . . . 19,536 79,047
Long-term bank debt . . . . . . . . . . . . . . . . . . . . 261 20,000
Long-term debt, net of current maturities . . . . . . . . . 1,380 8,628
Other non-current liabilities . . . . . . . . . . . . . . . 1,981 440
------------------ ------------------
Total liabilities . . . . . . . . . . . . . . . . 23,158 108,115
------------------ ------------------
Commitments and contingencies
Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . . . . . . 45 253
Restricted common stock . . . . . . . . . . . . . . . . - 27
Additional paid-in capital . . . . . . . . . . . . . . 887 252,445
Retained earnings . . . . . . . . . . . . . . . . . . . 11,704 2,657
------------------ ------------------
Total stockholders' equity . . . . . . . . . . . . . . 12,636 255,382
------------------ ------------------
Total liabilities and stockholders' equity . . . . $ 35,794 $ 363,497
================== ==================
The accompanying condensed notes to financial statements are an integral part
of these financial statements.
7
8
INTEGRATED ELECTRICAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Nine Months Ended June 30,
----------------------------------------
1997 1998
---------------- -----------------
(restated -
note 3)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79,847 $ 219,620
Cost of services . . . . . . . . . . . . . . . . . . . . . . . 65,189 173,420
---------------- -----------------
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . 14,658 46,200
Selling, general & administrative expenses . . . . . . . . . . 10,170 29,467
Non-cash non-recurring compensation charge in connection
with the Founding Company Acquisitions (Note 2) . . . . . - 17,036
Goodwill amortization . . . . . . . . . . . . . . . . . . . . . - 1,743
---------------- -----------------
Operating income(loss) . . . . . . . . . . . . . . . . . . 4,488 (2,046)
---------------- -----------------
Other (income)/expense:
Interest expense . . . . . . . . . . . . . . . . . . . . . 143 269
Interest income . . . . . . . . . . . . . . . . . . . . . (69) (288)
Gain on sale of assets . . . . . . . . . . . . . . . . . . (140) (195)
Other (income)/expense, net . . . . . . . . . . . . . . . 22 (134)
---------------- -----------------
(44) (348)
Income(loss) before income taxes . . . . . . . . . . . . . . . 4,532 (1,698)
Income tax provision . . . . . . . . . . . . . . . . . . . . . 1,847 6,443
---------------- -----------------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ 2,685 $ (8,141)
================ =================
Basic earnings (loss) per share . . . . . . . . . . . . . . . . $ .60 $ (.49)
================ =================
Diluted earnings (loss) per share . . . . . . . . . . . . . . . $ .60 $ (.49)
================ =================
Shares used in the computation
Of earnings (loss) per share (Note 5)-
Basic- . . . . . . . . . . . . . . . . . . . . . . . . . . 4,492,039 16,757,359
================ =================
Diluted- . . . . . . . . . . . . . . . . . . . . . . . . . 4,492,039 16,757,359
================ =================
The accompanying condensed notes to financial statements are an integral part
of these financial statements.
8
9
INTEGRATED ELECTRICAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
Three Months Ended June 30,
---------------------------------------
1997 1998
---------------- -----------------
(restated - note 3)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,746 $ 115,287
Cost of services . . . . . . . . . . . . . . . . . . . . . . . 25,124 91,294
---------------- -----------------
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . 5,622 23,993
Selling, general & administrative expenses . . . . . . . . . . 3,494 12,190
Goodwill amortization . . . . . . . . . . . . . . . . . . . . . - 1,103
---------------- -----------------
Operating income . . . . . . . . . . . . . . . . . . . . . 2,128 10,700
---------------- -----------------
Other (income)/expense:
Interest expense . . . . . . . . . . . . . . . . . . . . . 46 235
Interest income . . . . . . . . . . . . . . . . . . . . . (19) (201)
Gain on sale of assets . . . . . . . . . . . . . . . . . . (127) (180)
Other (income)/expense, net . . . . . . . . . . . . . . . 85 (26)
---------------- -----------------
(15) (172)
Income before income taxes . . . . . . . . . . . . . . . . . . 2,143 10,872
Income tax provision . . . . . . . . . . . . . . . . . . . . . 817 4,491
---------------- -----------------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,326 $ 6,381
================ =================
Basic earnings per share . . . . . . . . . . . . . . . . . . . $ .30 $ .24
================ =================
Diluted earnings per share . . . . . . . . . . . . . . . . . . $ .30 $ .24
================ =================
Shares used in the computation
Of earnings per share (Note 5)-
Basic- . . . . . . . . . . . . . . . . . . . . . . . . . . 4,492,039 26,475,914
================ =================
Diluted- . . . . . . . . . . . . . . . . . . . . . . . . . 4,492,039 27,151,005
================ =================
The accompanying condensed notes to financial statements are an integral part
of these financial statements.
9
10
INTEGRATED ELECTRICAL SERVICES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
Common Stock Restricted Common Stock Additional Total
-------------------- ----------------------- Paid-In Retained Stockholder
Shares Amount Shares Amount Capital Earning Equity
--------- ------- -------- ------ --------- -------- ---------
BALANCE, September 30, 1997 . . . . . . . . 4,492,039 $ 45 - $ - $ 887 $ 11,704 $ 12,636
Non-cash non-recurring
compensation charge . . . . . . . . . . - - - - 17,036 - 17,036
Initial public offering of stock . . . . . 8,050,000 80 - - 91,433 - 91,513
Issuance of stock for acquisitions . . . . 12,736,611 128 2,655,709 27 160,715 - 160,870
Distribution to Accounting
Acquirer . . . . . . . . . . . . . . . . - - - - (17,626) (888) (18,514)
Net loss . . . . . . . . . . . . . . . . . - - - - - (8,141) (8,141)
Other . . . . . . . . . . . . . . . . . . - - - - - (18) (18)
---------- ------- --------- ----- --------- -------- ---------
BALANCE, June 30, 1998 . . . . . . . . . . . 25,278,650 $ 253 2,655,709 $ 27 $ 252,445 $ 2,657 $ 255,382
========== ======= ========= ===== ========= ======== =========
The accompanying condensed notes to financial statements are an integral part
of these financial statements.
10
11
INTEGRATED ELECTRICAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended June 30,
------------------------------------
1997 1998
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . $ 2,685 $ (8,141)
Non-cash non-recurring compensation charge (Note 2) . . . . . - 17,036
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization . . . . . . . . . . . . . . 342 2,918
Gain on sale of property and equipment . . . . . . . . . (140) (195)
Changes in operating assets and liabilities
(Increase) decrease in
Accounts receivable . . . . . . . . . . . . . . . . (1,417) (7,004)
Inventories . . . . . . . . . . . . . . . . . . . . (1,062) 548
Costs and estimated earnings recognized in
excess of billings on uncompleted contacts . . . . (461) (1,234)
Prepaid expenses and other current assets . . . . . 50 632
Increase (decrease) in
Accounts payable and accrued expenses . . . . . . . 542 (2,359)
Billings in excess of costs and estimated earnings
recognized on uncompleted contracts . . . . . . (38) 5,882
Other current liabilities . . . . . . . . . . . . . (424) (216)
Other, net . . . . . . . . . . . . . . . . . . . . . . . 63 2
--------------- ---------------
Net cash provided by operating activities . . . . . . . . . . 140 7,869
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired . . . . . . . . . - (66,588)
Proceeds from sale of property and equipment . . . . . . . . . 30 686
Additions to property and equipment . . . . . . . . . . . . . (771) (2,731)
Increase in notes receivable . . . . . . . . . . . . . . . . . (76) -
Collections of notes receivable . . . . . . . . . . . . . . . 6 475
--------------- ---------------
Net cash used in investing activities . . . . . . . . . . . . (811) (68,158)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt . . . . . . . . . . . . . . . . . . . . . . 4,232 20,626
Payments of debt . . . . . . . . . . . . . . . . . . . . . . . (4,071) (24,909)
Distributions to Accounting Acquirer . . . . . . . . . . . . . - (17,758)
Proceeds from initial public offering . . . . . . . . . . . . - 91,513
--------------- ---------------
Net cash provided by financing activities. . . . . . . . . . . 161 69,472
--------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . (510) 9,183
--------------- ---------------
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . 5,310 4,154
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . $ 4,800 $ 13,337
=============== ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for
Interest . . . . . . . . . . . . . . . . . . . . . . . . $ 63 $ 161
Income taxes. . . . . . . . . . . . . . . . . . . . . . . $ 1,204 $ 3,308
Non cash property distribution. . . . . . . . . . . . . . $ - $ 756
The accompanying condensed notes to financial statements are an integral part
of these financial statements.
11
12
INTEGRATED ELECTRICAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended June 30,
--------------------------------------
1997 1998
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,326 $ 6,381
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization . . . . . . . . . . . . . . 126 1,746
Gain on sale of property and equipment . . . . . . . . . (127) (180)
Changes in operating assets and liabilities
(Increase) decrease in
Accounts receivable . . . . . . . . . . . . . . . . (2,686) (1,716)
Inventories . . . . . . . . . . . . . . . . . . . . (1,025) 282
Costs and estimated earnings recognized in
excess of billings on uncompleted contacts . . (400) (1,835)
Prepaid expenses and other current assets . . . . . 158 594
Increase (decrease) in
Accounts payable and accrued expenses . . . . . . . 1,388 825
Billings in excess of costs and estimated earnings
recognized on uncompleted contracts . . . . . . 123 1,534
Other current liabilities . . . . . . . . . . . . . (104) (1,378)
Other, net . . . . . . . . . . . . . . . . . . . . . . . 88 63
---------------- ----------------
Net cash provided by (used in) operating activities . . . . . (1,133) 6,316
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of businesses, net of cash acquired . . . . . . . . . - (30,891)
Proceeds from sale of property and equipment . . . . . . . . . 1 604
Additions to property and equipment . . . . . . . . . . . . . (284) (728)
Increase in notes receivable . . . . . . . . . . . . . . . . . (76)
Collections of notes receivable . . . . . . . . . . . . . . . 2 -
---------------- ----------------
Net cash used in investing activities . . . . . . . . . . . . (357) (31,015)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of debt . . . . . . . . . . . . . . . . . . . . . . 2,527 20,000
Payments of debt . . . . . . . . . . . . . . . . . . . . . . . (2,164) (4,358)
---------------- ----------------
Net cash provided by financing activities . . . . . . . . . . 363 15,642
---------------- ----------------
NET DECREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . (1,127) (9,057)
---------------- ----------------
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . 5,927 22,394
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . $ 4,800 $ 13,337
================ ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for
Interest . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 161
Income taxes . . . . . . . . . . . . . . . . . . . . . . $ - $ 3,308
The accompanying condensed notes to financial statements are an integral part
of these financial statements.
12
13
INTEGRATED ELECTRICAL SERVICES, INC.
CONDENSED NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. OVERVIEW
The accompanying unaudited condensed historical financial statements of the
Company and the accompanying unaudited pro forma combined financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and Article 10 and Article 11 of Regulation
S-X, respectively. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and therefore the financial statements included herein
should be reviewed in conjunction with the financial statements and related
notes thereto contained in the Registration Statement on Form S-1 (No.
333-50031) (the "Registration Statement") filed by IES with the Securities and
Exchange Commission. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Historical operating results for the nine and three months
ended June 30, 1998, are not necessarily indicative of the results that may be
expected for the year ended September 30, 1998.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There were no significant changes in the accounting policies during the periods
presented. For a description of these policies, refer to Note 2 of the Notes
to Financial Statements of the Accounting Acquirer and each of the other
Founding Companies included in the Registration Statement.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. INITIAL PUBLIC OFFERING, FOUNDING COMPANY ACQUISITIONS, AND NON-CASH,
NON-RECURRING COMPENSATION CHARGE
On January 30, 1998, the Company completed its initial public offering of its
stock, which involved the sale to the public of 7,000,000 shares of the
Company's common stock at $13.00 per share. The Company received net proceeds
from the Offering of approximately $78.8 million. Concurrent with the
completion of the Offering, IES acquired the Founding Companies for
consideration consisting of $53.4 million in cash and 12,313,025 shares of
common stock. Additionally, on February 5, 1998, the Company sold 1,050,000
shares of its common stock pursuant to the overallotment option granted to the
underwriters in connection with the Offering for net proceeds of approximately
$12.7 million. The Company used approximately $7.6 million of the net proceeds
from the Offering to retire outstanding third party debt and approximately
$16.0 million to pay indebtedness incurred by the Founding Companies for
distributions to the owners prior to the Acquisitions. The Company used the
remaining net proceeds for acquisitions (see Note 3).
13
14
Pursuant to the SEC's SAB 97, Houston-Stafford due to its significance is for
accounting purposes considered the entity which acquired the other Founding
Companies and IES (the "Accounting Acquirer"). As such, the Company's actual
results of operations for the nine and three months ended June 30, 1997 and
1998, respectively, include the results of operations of Houston-Stafford and
the Pooled Company (see Note 3). The Founding Companies are included in the
Company's results of operations beginning February 1, 1998, and the Purchased
Companies beginning on their respective dates of acquisition (see Note 3).
Houston-Stafford's results of operations through January 30, 1998, include for
financial statement presentation purposes a non-cash, non-recurring
compensation charge of approximately $17.0 million required by the SEC in
connection with a note receivable and rights held by an officer of
Houston-Stafford which was exchanged for cash and shares of IES Common Stock
(see Overview and Basis of Presentation for Financial Statements).
3. ACQUISITIONS
Subsequent to its IPO, and through June 30, 1998, the Company has acquired 11
additional electrical contracting and maintenance businesses for approximately
$30.9 million of cash and 3.5 million shares of common stock (the "Post IPO
Acquisitions"). Of these 11 Post IPO Acquisitions, 10 were accounted for using
the purchase method of accounting (the "Purchased Companies") and the Pooled
Company was accounted for using the pooling-of-interests method of accounting.
Accordingly, the Company's historical financial statements have been restated
to include the historical financial statements of the Pooled Company.
The total consideration paid for the Purchased Companies was approximately
$73.0 million (including assumed debt of approximately $5.2 million). The
$53.7 million excess of the total consideration paid over the net tangible
assets acquired has been recorded as goodwill in the accompanying consolidated
financial statements. The accompanying balance sheets include allocations of
the respective purchase prices to the assets acquired and liabilities assumed
based on preliminary estimates of fair value and are subject to final
adjustment.
The unaudited pro forma data presented below assume that the Founding Company
Acquisitions, the Offering, and the Post IPO Acquisitions had occurred at the
beginning of each period presented:
14
15
Nine Months Ended June 30,
--------------------------------------
1997 1998
---------------- ---------------
(in thousands, except per share data)
Revenues . . . . . . . . . . . . . . . . $ 362,127 $ 412,411
Net Income . . . . . . . . . . . . . . . $ 16,561 $ 20,954
Basic Earnings Per Share . . . . . . . . $ .59 $ .74
Diluted Earnings Per Share . . . . . . . $ .59 $ .73
4. LONG-TERM DEBT
On August 7, 1998, the Company increased its three-year revolving credit
facility with NationsBank of Texas, N.A. as agent (the "Credit Facility") from
$70.0 million to $175.0 million. The Credit Facility matures on July 30, 2001,
bears interest at the bank's prime rate or LIBOR, at the Company's option, plus
an applicable margin based on the ratio of debt to EBITDA (as defined). An
annual commitment fee from 0.25% to 0.375% is payable on any unused portion of
the Credit Facility. The Company's subsidiaries have guaranteed the repayment of
all amounts due under the facility, and the facility is secured by the capital
stock of the guarantors and the accounts receivable of the Company and the
guarantors. As of June 30, 1998, $20 million was borrowed under the Credit
Facility.
The Credit Facility will be used to fund acquisitions, capital expenditures and
working capital requirements. Under the terms of the Credit Facility the
Company is required to comply with various affirmative and negative covenants
including: (i) the maintenance of certain financial ratios, (ii) restrictions
on additional indebtedness, and (iii) restrictions on liens, guarantees and
dividends.
5. PER SHARE INFORMATION
Basic earnings per share calculations are based on the weighted average number
of shares of common stock and restricted voting common stock outstanding.
Diluted earnings per share calculations are based on the weighted average
number of common shares outstanding and common equivalent shares from the
assumed exercise of outstanding stock options.
Upon completion of the Founding Company Acquisitions, the Offering, the
restatement for the acquisition of the Pooled Company, and the exercise of the
underwriters' overallotment option, the Company had 22,899,627 shares of its
common stock and 2,655,709 shares of its restricted voting common stock issued
and outstanding. As of June 30, 1998, the Company had outstanding options to
purchase up to a total of approximately 2,895,803 shares of Common Stock issued
pursuant to the Company's stock option plans. The shares used to calculate the
pro forma and historical earnings per share for the periods presented are
summarized as follows:
15
16
Nine Months Ended June 30,
--------------------------------
1997 1998
----------- ----------
Pro Forma -
Weighted average shares outstanding . . . . . . . . 25,555,336 25,859,032
Weighted average equivalent shares
from outstanding stock options . . . . . . . . 120,000 357,249
----------- ----------
25,675,336 26,216,281
Historical - =========== ==========
Weighted average shares outstanding . . . . . . . . 4,492,039 16,757,359
=========== ==========
Three Months Ended June 30,
--------------------------------
1997 1998
----------- ----------
Pro Forma -
Weighted average shares outstanding . . . . . . . . 25,555,336 N/A
Weighted average equivalent shares
from outstanding stock options . . . . . . . . 120,000 N/A
----------- ----------
25,675,336 N/A
Historical - =========== ==========
Weighted average shares outstanding . . . . . . . . 4,492,039 26,475,914
Weighted average equivalent shares
from outstanding stock options . . . . . . . . - 675,091
----------- ----------
4,492,039 27,151,005
=========== ==========
The weighted average equivalent shares from outstanding stock options are
excluded from the historical earnings (loss) per share calculations for the
nine months ended June 30, 1998, because the effect would be anti-dilutive.
6. COMMITMENTS AND CONTINGENCIES
Subsidiaries of the Company are involved in various legal proceedings that have
arisen in the ordinary course of business. While it is not possible to predict
the outcome of such proceedings with certainty, in the opinion of the Company's
management, all such proceedings are either adequately covered by insurance or,
if not so covered should not ultimately result in any liability which would
have a material adverse effect on the financial position, liquidity or results
of operations of the Company.
16
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
The following should be read in conjunction with the response to Part I, Item 1
of this Report and the Registration Statement. Any capitalized terms used but
not defined in this Item have the same meaning given to them in Part I, Item 1.
This report on Form 10-Q includes certain statements that may be deemed to be
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These statements are based on the Company's
expectations and involve risks and uncertainties that could cause the Company's
actual results to differ materially from those set forth in the statements.
Such risks and uncertainties include, but are not limited to, the ability to
successfully consummate acquisitions, fluctuations in operating results because
of acquisitions and seasonality, national and regional industry and economic
conditions, competition and risks entailed in the operation and growth of
existing and newly acquired businesses. The foregoing and other factors are
discussed in the Registration Statement.
RESULTS OF OPERATIONS
The unaudited supplemental pro forma combined financial information for the nine
months ended June 30, 1997 and 1998, and the three months ended June 30, 1997,
assumes the results of operations include the Founding Companies as if they had
been acquired at the beginning of each period presented and have been restated
to include the pro forma results of operations of the Pooled Company. Additional
pro forma adjustments include: (a) the reversal of Houston-Stafford's non-cash,
non-recurring compensation charge of approximately $17.0 million as noted above,
(b) certain reductions in salaries, bonuses, benefits and lease payments to the
former owners of the Founding Companies and the Pooled Company which they agreed
would take effect as of the effective date of their respective acquisitions, (c)
amortization of goodwill resulting from the Founding Company Acquisitions, and
(d) elimination of interest income and increased interest expense on borrowings
of $6.4 million to fund certain S corporation distributions related to the
Founding Company Acquisitions. The Purchased Companies have been included in the
Company's results of operations beginning on their respective dates of
acquisition.
The pro forma adjustments are based on estimates, available information and
certain assumptions which may be revised as additional information becomes
available. The supplemental pro forma financial data do not purport to
represent what the Company's combined financial position or results of
operations would actually have been if such transactions had in fact occurred
on those dates and are not necessarily representative of the Company's
financial position or results of operations for any future period. Since the
companies acquired were not under common control or management, historical
results may not be comparable to, or indicative of, future performance.
PRO FORMA COMBINED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30,
1997 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 1998
The following table presents selected pro forma combined historical financial
information for the nine months ended June 30, 1997 and 1998.
17
18
Nine Months Ended June 30,
-------------------------------------------------------------------
1997 % 1998 %
--------------- -------- ------------- --------
(dollars in thousands)
Revenues . . . . . . . . . . . $ 250,296 100.0 % $ 303,077 100.0 %
Cost of services . . . . . . . 198,888 79.5 % 238,129 78.6 %
--------------- -------- ------------- --------
Gross Profit . . . . . . . . . 51,408 20.5 % 64,948 21.4 %
Selling, general &
administrative expenses. . . 27,849 11.1 % 34,085 11.2 %
Goodwill amortization . . . . . 2,886 1.2 % 3,012 1.0 %
--------------- -------- ------------- --------
Operating income . . . . . . . $ 20,673 8.2 % $ 27,851 9.2 %
=============== ======== ============= ========
REVENUES. Pro forma combined revenues increased $52.8 million, or 21%, from
$250.3 million for the nine months ended June 30, 1997, to $303.1 million for
the nine months ended June 30, 1998. Approximately $12.3 million of this
increase is attributed to additional revenues resulting from the acquisitions
of the Purchased Companies during the three months ended June 30, 1998. The
remaining increase in combined revenues is principally due to higher demand for
commercial services related to high rise condominiums and retail
establishments, higher demand for multi-family apartments, increased demand for
single-family electrical installation, and the acquisition of an electrical
supply company in 1997, which were partially offset by the effects of the
completion of several large manufacturing and distribution facility projects in
the prior year and customer delays of similar large projects expected to begin
in fiscal 1998 until fiscal 1999. The 1997 results were also negatively
affected by an abnormally harsh winter in South Dakota and the impact of
extended wet weather on residential construction in Texas.
GROSS PROFIT. Pro forma combined gross profit increased $13.5 million, or 26%,
from $51.4 million for the nine months ended June 30, 1997, to $64.9 million for
the nine months ended June 30, 1998. The increase in pro forma combined gross
profit is principally due to the increases in revenues as a result of the
acquisitions and the overall increase in demand as discussed above. As a
percentage of pro forma combined revenues, pro forma combined gross profit
increased from 20.5% in 1997 to 21.4% in 1998. The increase is primarily
attributed to a decrease in 1997 margins resulting from the abnormally harsh
winter in South Dakota and the impact of extended wet weather in Texas discussed
above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Pro forma combined selling,
general and administrative expenses increased $6.3 million or 23% from $27.8
million for the nine months ended June 30, 1997, to $34.1 million for the nine
months ended June 30, 1998. Approximately $1.4 million of this increase is
attributed to additional corporate costs incurred in 1998 associated with being
a public company which did not exist in 1997. The remaining increase in pro
forma combined selling, general and administrative expenses is principally due
to the acquisitions of the Purchased Companies and the acquisition of the
electrical supply company noted above. As a percentage of pro forma combined
revenues, pro forma combined selling, general and administrative expenses,
excluding corporate overhead, decreased from 10.9% in 1997 to 10.6% in 1998.
This decrease is attributed to the fixed cost component of these expenses.
18
19
OPERATING INCOME. Pro forma combined operating income increased $7.2 million,
or 35%, from $20.7 million for the nine months ended June 30, 1997, to $27.9
million for the nine months ended June 30, 1998. The increase in pro forma
combined operating income was attributable to the factors discussed above. As a
percentage of pro forma combined revenues, pro forma combined operating income
increased from 8.2% (8.5% excluding corporate overhead) for the nine months
ended June 30, 1997, to 9.2% (9.8% excluding corporate overhead) for the nine
months ended June 30, 1998. This increase is primarily attributed to the
increase in gross profit as a percentage of revenue noted above.
PRO FORMA COMBINED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,
1997 COMPARED TO THE HISTORICAL RESULTS OF OPERATIONS FOR THE THREE MONTHS
ENDED JUNE 30, 1998
The following table presents selected pro forma combined and historical
financial information for the three months ended June 30, 1997 and 1998
(dollars in thousands).
Three Months Ended June 30,
-------------------------------------------------------------------
1997 % 1998 %
--------------- -------- ------------- --------
(Supplemental
pro forma)
Revenues . . . . . . . . . . . $ 87,258 100.0 % $ 115,287 100.0 %
Cost of services . . . . . . . 69,539 79.7 % 91,294 79.2 %
--------------- -------- ------------- --------
Gross Profit . . . . . . . . . 17,719 20.3 % 23,993 20.8 %
Selling, general &
administrative expenses . 8,976 10.3 % 12,190 10.6 %
Goodwill amortization . . . . . 962 1.1 % 1,103 1.0 %
--------------- -------- ------------- --------
Operating income . . . . . . . $ 7,781 8.9 % $ 10,700 9.2 %
=============== ======== ============= ========
REVENUES. Revenues increased $28.0 million, or 32%, from $87.3 million for the
three months ended June 30, 1997, to $115.3 million for the three months ended
June 30, 1998. Approximately $12.3 million of this increase is attributed to
additional revenues resulting from the acquisitions of the Purchased Companies
during the three months ended June 30, 1998. The remaining increase in
revenues is principally due to higher demand for commercial services related to
high rise condominiums and retail establishments, higher demand for
multi-family apartments, increased demand for single-family electrical
installation, and the acquisition of an electrical supply company in 1997,
which were partially offset by customer delays of several large projects
expected in fiscal 1998 until fiscal 1999.
GROSS PROFIT. Gross profit increased $6.3 million, or 36%, from $17.7 million
for the three months ended June 30, 1997, to $24.0 million for the three months
ended June 30, 1998. The increase in gross profit is principally due to the
increases in revenues as a result of the acquisitions and the overall increase
in demand as discussed above. As a percentage of revenues, gross profit
increased from 20.3% for the three months ended June 30, 1997, to 20.8%
19
20
for the three months ended June 30, 1998. This increase is primarily
attributable to strong demand for the Company's services noted above, as well as
the initial benefits of internal programs established to focus on margin
improvement.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $3.2 million, or 36%, from $9.0 million for
the three months ended June 30, 1997, to $12.2 million for the three months
ended June 30, 1998. Approximately $1.0 million of this increase is attributed
to additional corporate costs incurred in 1998 associated with being a public
company which did not exist in 1997. The remaining increase in selling,
general and administrative expenses is primarily attributable to the additional
costs associated with the overall increase in revenues and the acquisition of
an electrical supply company noted above. As a percentage of revenues, selling,
general and administrative expenses, excluding corporate overhead, decreased
from 10.0% in 1997, to 9.5% in 1998. This decrease is attributed to the fixed
cost component of these expenses.
OPERATING INCOME. Operating income increased $2.9 million, or 37%, from $7.8
million for the three months ended June 30, 1997, to $10.7 million for the
three months ended June 30, 1998. The increase in operating income was
attributable to the factors discussed above. As a percentage of revenues,
operating income increased from 8.9% (9.2% excluding corporate overhead) for
the three months ended June 30, 1997, to 9.2% (10.2% excluding corporate
overhead) for the three months ended June 30, 1998. This increase is primarily
attributed to the increase in gross profit as a percentage of revenue noted
above.
HISTORICAL RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED JUNE 30, 1997
COMPARED TO THE NINE MONTHS ENDED JUNE 30, 1998
The following table presents selected historical financial information for the
nine months ended June 30, 1997 and 1998. The historical results of operations
presented below include the results of operations of Houston-Stafford and the
Pooled Company for the nine months ended June 30, 1997 and 1998, the results of
operations of IES and the other Founding Companies beginning February 1, 1998,
and the results of operations of the Purchased Companies beginning on their
respective dates of acquisition. See Overview and Basis of Presentation for
Financial Statements for further discussion.
20
21
Nine Months Ended June 30,
-------------------------------------------------------------------
1997 % 1998 %
--------------- -------- ------------- --------
(dollars in thousands)
Revenues . . . . . . . . . . . $ 79,847 100.0 % $ 219,620 100.0 %
Cost of services . . . . . . . 65,189 81.6 % 173,420 79.0 %
--------------- -------- ------------- --------
Gross Profit . . . . . . . . . 14,658 18.4 % 46,200 21.0 %
Selling, general &
administrative expenses. . . 10,170 12.8 % 29,467 13.4 %
Goodwill amortization . . . . . - - % 1,743 .8 %
--------------- -------- ------------- --------
Operating income before
non-cash non-recurring
compensation charge
in connection with
the Founding Company
acquisitions. . . . . . . . .$ 4,488 5.6 % $ 14,990 6.8 %
=============== ======== ============= ========
REVENUES. Revenues increased $139.8 million, or 175%, from $79.8 million for the
nine months ended June 30, 1997, to $219.6 million for the nine months ended
June 30, 1998. The increase in revenues is principally due to the acquisition of
the Founding Companies (excluding Houston-Stafford) on January 30, 1998, and the
acquisition of the Purchased Companies during the three months ended June 30,
1998.
GROSS PROFIT. Gross profit increased $31.5 million, or 215%, from $14.7 million
for the nine months ended June 30, 1997, to $46.2 million for the nine months
ended June 30, 1998. The increase in gross profit was principally due to the
Acquisitions of the Founding Companies (excluding Houston-Stafford) on January
30, 1998, and the acquisitions of the Purchased Companies during the three
months ended June 30, 1998. As a percentage of revenues, gross profit
increased from 18.4% in 1997 to 21.0% in 1998. This increase is attributed to
Houston Stafford's lower markup on certain materials acquired under significant
customer contracts and additional overtime in the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $19.3 million, or 189%, from $10.2 million
for the nine months ended June 30, 1997, to $29.5 million for the nine months
ended June 30, 1998. This increase in selling, general and administrative
expenses was primarily attributable to the Acquisitions of the Founding
Companies (excluding Houston-Stafford) on January 30, 1998, the acquisitions of
the Purchased Companies during the three months ended June 30, 1998, a $5.6
million bonus paid to the owners of Houston-Stafford during the four months
ended in January 1998, compared to a $1.5 million bonus during the four months
ended in January 1997, and approximately $1.7 million of additional corporate
costs incurred in 1998 associated with being a public company which did not
exist in 1997. Excluding such bonuses and higher corporate costs, selling,
general and administrative expenses as a percentage of revenues decreased from
10.7% in 1997 to 10.0% in 1998.
21
22
OPERATING INCOME. Operating income increased $10.5 million, or 233%, from $4.5
million for the nine months ended June 30, 1997, to $15.0 million for the nine
months ended June 30, 1998. This increase in operating income is primarily
attributed to the Founding Company Acquisitions (excluding Houston-Stafford) on
January 30, 1998, the acquisitions of the Purchased Companies during the three
months ended June 30, 1998, the non-recurring owner bonuses in 1997, which was
partially offset by higher corporate costs discussed above. As a percentage of
revenues, operating income (excluding the owner bonuses and higher corporate
costs noted above) increased from 7.7% in 1997 to 10.3% in 1998.
HISTORICAL RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1997
COMPARED TO THE THREE MONTHS ENDED JUNE 30, 1998
The following table presents selected historical financial information for the
three months ended June 30, 1997 and 1998. The historical results of operations
presented below include the results of operations of Houston-Stafford and the
Pooled Company for the three months ended June 30, 1997 and 1998, the results
of operations of IES and the other Founding Companies beginning February 1,
1998, and the results of the Purchased Companies beginning on their respective
dates of acquisition. See Overview and Basis of Presentation of Financial
Statements for further discussion.
Three Months Ended June 30,
-------------------------------------------------------------------
1997 % 1998 %
--------------- -------- ------------- --------
(dollars in thousands)
Revenues . . . . . . . . . . . $ 30,746 100.0 % $ 115,287 100.0 %
Cost of services . . . . . . 25,124 81.7 % 91,294 79.2 %
--------------- -------- ------------- --------
Gross Profit . . . . . . . . 5,622 18.3 % 23,993 20.8 %
Selling, general &
administrative expenses. . 3,494 11.4 % 12,190 10.6 %
Goodwill amortization . . . . - - % 1,103 .9 %
--------------- -------- ------------- --------
Operating income . . . . . . . . $ 2,128 6.9 % $ 10,700 9.3 %
=============== ======== ============= ========
REVENUES. Revenues increased $84.6 million, or 276%, from $30.7 million for the
three months ended June 30, 1997, to $115.3 million for the three months
ended June 30, 1998. The increase in revenues is principally due to the
acquisition of the Founding Companies (excluding Houston-Stafford) on January
30, 1998, and the acquisition of the Purchased Companies during the three months
ended June 30, 1998.
GROSS PROFIT. Gross profit increased $18.4 million, or 329%, from $5.6 million
for the three months ended June 30, 1997, to $24.0 million for the three months
ended June 30, 1998. The increase in cost of services was principally due to the
Acquisitions of the Founding Companies (excluding Houston-Stafford) on January
30, 1998, the acquisitions of the Purchased Companies during the three months
ended June 30, 1998, and partially offset by the increase in non-recurring owner
bonuses and the higher corporate costs discussed above. As a percentage of
revenues, gross profit increased from 18.3% in 1997 to 20.8% in 1998. This
increase was due
22
23
to Houston Stafford's lower markup on certain materials acquired under
significant customer contracts for multi-family apartments and additional
overtime in the prior year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $8.7 million, or 249%, from $3.5 million for
the three months ended June 30, 1997, to $12.2 million for the three months
ended June 30, 1998. This increase in selling, general and administrative
expenses was primarily attributable to the Acquisitions of the Founding
Companies (excluding Houston-Stafford) on January 30, 1998, and the
acquisitions of the Purchased Companies during the three months ended June 30,
1998, and approximately $1.3 million of additional corporate costs in 1998
associated with being a public company which did not exist in 1997. Excluding
such higher corporate costs, selling, general and administrative expenses as a
percentage of revenues decreased from 10.9% in 1997 to 9.2% in 1998.
OPERATING INCOME. Operating income increased $8.6 million, or 410%, from $2.1
million for the three months ended June 30, 1997, to $10.7 million for the three
months ended June 30, 1998. This increase in operating income is primarily
attributed to the Founding Company Acquisitions (excluding Houston-Stafford) on
January 30, 1998, the acquisitions of the Purchased Companies, which was
partially offset by the higher corporate costs discussed above. As a percentage
of revenues, operating income increased from 6.9% in 1997 to 9.3% in 1998.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1998, the Company had cash of $13.3 million and available
capacity under its bank credit facility of $49.0 million.
During the three months ended June 30, 1998, the Company generated $6.3 million
of net cash from operating activities. Net cash used in investing activities
was $31.0 million including $30.9 million used for the purchase of businesses.
Net cash flows provided by financing activities was $15.6 resulting primarily
from borrowings under the Company's Credit Facility.
On August 7, 1998, the Company increased its three-year revolving credit
facility from $70.0 million to $175.0 million (the "Credit Facility"). The
Credit Facility is used for working capital, capital expenditures, other
corporate purposes and acquisitions. The amounts borrowed under the Credit
Facility bear interest at an annual rate equal to either (a) the London
interbank offered rate ("LIBOR") plus 1.0% to 2.0%, as determined by the ratio
of the Company's total funded debt to EBITDA (as defined), or (b) the higher of
(i) the bank's prime rate and (ii) the Federal Funds rate plus 0.5%, plus up to
an additional 0.5% as determined by the ratio of the Company's total funded
debt to EBITDA. Commitment fees of 0.25% to 0.375%, as determined by the ratio
of the Company's total funded debt to EBITDA, are due on any unused borrowing
capacity under the Credit Facility. The Company's subsidiaries have guaranteed
the repayment of all amounts due under the facility, and the facility is
secured by the capital stock of the guarantors and the accounts receivable of
the Company and the guarantors. The Credit Facility requires the consent of
the lenders for acquisitions exceeding a certain level of cash consideration,
prohibits the payment of cash dividends on the Company's common stock,
restricts the ability of the Company to incur other indebtedness and requires
the Company to comply with certain financial covenants. Availability of the
Credit Facility is subject to customary drawing conditions.
23
24
The Company anticipates that its cash flow from operations and proceeds from
its Credit Facility will provide sufficient cash to enable the Company to meet
its working capital needs, debt service requirements and planned capital
expenditures for property and equipment through 1998.
Through August 14, 1998, the Company utilized a combination of cash and its
common stock to acquire twelve companies and the Founding Companies with total
annualized revenues of approximately $558 million. The cash component of
the consideration paid for these companies was funded with proceeds from the
IPO, existing cash, and borrowings under the Credit Facility.
The Company has signed letters of intent with seven companies with aggregate
1997 revenues of approximately $90 million. These transactions are subject to
due diligence, applicable regulatory approvals, and customary closing
conditions, therefore there can be no assurance that these transactions will be
consummated.
The Company intends to continue to pursue acquisition opportunities. The
timing, size or success of any acquisition effort and the associated potential
capital commitments cannot be predicted. The Company expects to fund future
acquisitions primarily with working capital, cash flow from operations and
borrowings, including any unborrowed portion of the Credit Facility, as well as
issuances of additional equity. To the extent the Company funds a significant
portion of the consideration for future acquisitions with cash, it may have to
increase the amount of the Credit Facility or obtain other sources of
financing, including the issuance of additional debt or equity. Capital
expenditures for equipment and expansion of facilities are expected to be
funded from cash flow from operations and supplemented as necessary by
borrowings under the Credit Facility.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's results of operations from residential construction are seasonal,
depending on weather trends, with typically higher revenues generated during
the spring and summer and lower revenues during the fall and winter. The
commercial and industrial aspect of the Company's business is less subject to
seasonal trends, as this work is performed inside structures protected from the
weather. The Company's service business is generally not affected by
seasonality. In addition, the construction industry has historically been
highly cyclical. The Company's volume of business may be adversely affected by
declines in construction projects resulting from adverse regional or national
economic conditions. Quarterly results may also be materially affected by the
timing of new construction projects and acquisitions and the timing and
magnitude of acquisition assimilation costs. Accordingly, operating results
for any fiscal period are not necessarily indicative of results that may be
achieved for any subsequent fiscal period.
24
25
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a new fair value
based method of accounting for employee stock options or similar equity
instruments and the current intrinsic, value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25").
Entities electing to remain with the accounting in APB No. 25 must make pro
forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated annual financial statements.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for the way
public enterprises are to report information about operating segments in annual
financial statements and requires the reporting of selected information about
operating segments in interim financial reports issued to shareholders. SFAS
No. 131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997, at which time the Company will
adopt the provision. This statement is not anticipated to have a material
impact on the Company's financial disclosures.
YEAR 2000 DATE CONVERSION
The Company is in the process of identifying and evaluating potential issues for
its information technology and third party relationships associated with the
date change in the year 2000. The Company has not yet fully assessed any Year
2000 remedial costs, but is in the process of identifying and developing
solutions to the Year 2000 issues. While the Company is not currently able to
quantify the cost of corrective actions, it does not expect that these actions
will materially exceed the cost of normal software upgrades and replacements
expected to occur through the year 2000. While the Company believes all
necessary work will be completed in a timely fashion, it cannot guarantee that
the systems of other companies on which the Company relies will be converted
within the same timeframe. The Company is attempting to obtain assurances from
vendors, business partners, and others with which it conducts business that
their systems will be Year 2000 compliant. If as a result of the foregoing
process, the Company determines that a material business interruption may occur
due to the Year 2000 issue, it will attempt to implement an appropriate
contingency plan.
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26
INTEGRATED ELECTRICAL SERVICES, INC.
PART II. OTHER INFORMATION
ITEM 2. USE OF PROCEEDS
Use of Proceeds
On January 26, 1998, the Company commenced its initial public offering
of 7,000,000 shares of the Company's common stock, par value $0.01 per
share, at $13.00 per share pursuant to a Registration Statement on
Form S-1 (333-38715) with respect to 8,050,000 shares of common stock
which became effective on January 26, 1998. The managing underwriters
of the offering were Merrill Lynch & Co., Donaldson, Lufkin & Jenrette
Securities Corporation, SunTrust Equitable Securities Corporation and
Sanders Morris Mundy. The Offering, which closed on January 30, 1998,
yielded proceeds of $91.0 million. Additionally, on February 5, 1998,
the Company sold the entire 1,050,000 shares of its common stock
subject to the overallotment option granted to the underwriters in
connection with the Offering and yielded additional proceeds of $13.6
million. Of these total proceeds, $7.3 million was retained by the
underwriters as their discount and commission and approximately $5.8
million was used to repay expenses incurred in connection with the
Offering. Of the approximate $5.8 million in expenses, $3.2 million
was paid to a director of the Company in order to repay principal and
interest on funds advanced by such director with respect to expenses
incurred by the Company. A portion of the remaining net proceeds to
the Company of $91.5 million were used to pay approximately $53.4
million of partial consideration to the owners of the Founding
Companies (including approximately $23.5 million to certain directors
of the Company), to retire approximately $7.6 million of outstanding
third party debt and pay approximately $16.0 million of indebtedness
incurred by the Founding Companies for distributions to the owners
prior to the Acquisitions. The Company used the remaining net
proceeds for acquisitions during the three months ended June 30, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS:
27. Financial Data Schedule
26
27
INTEGRATED ELECTRICAL SERVICES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized, who has signed this report on behalf of
the Registrant and as the principal financial officer of the Registrant.
INTEGRATED ELECTRICAL SERVICES, INC.
Date: August 14, 1998 By: /s/ JIM P. WISE
--------------------------------
Jim P. Wise
Senior Vice President and
Chief Financial Officer
27
28
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------
27 FINANCIAL DATA SCHEDULE
5
1,000
9-MOS
SEP-30-1998
OCT-01-1997
JUN-30-1998
13,337
0
110,541
3,083
5,917
136,551
20,882
4,113
363,497
79,047
0
0
0
280
255,102
363,497
303,077
303,077
238,129
275,226
(64)
0
678
27,915
11,852
16,063
0
0
0
16,063
.62
.61
